Worried about Greece? Here’s how to protect your wealth

published 21 May 2012

There were plenty of interesting talks at last Friday's MoneyWeek 2012 conference, on everything from the next big emerging markets to the outlook for gold.

But the one question that was on almost every attendee's lips was: what's going to happen in Europe?

My gut feeling, I said, was that Greece would default and leave the euro. But the question of when, and just how chaotically, is impossible to predict. And unfortunately, that's the bit that will most affect investors.

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So how can we deal with this sort of uncertainty?

The heart of Europe's problems

There's an interesting interview in US financial paper Barron's this week with Ray Dalio, who seems to be the latest guru investor that everyone's fallen in love with.

Dalio is head of Bridgewater Associates, which is the world's largest hedge fund group. You can read our profile of him here. For now, suffice to say he has a decent track record and takes a big picture view of things.

Inevitably, the Europe question comes up in the interview. Dalio doesn't say anything especially new. That shouldn't be a surprise: there isn't much more to say.

Europe's fundamental problem is self-evident: it has 17 nations sharing a currency, but almost nothing else. When economies diverge from one another to the extent that Germany and Greece do, the only way they can comfortably share a currency is if Germany is prepared to pay for Greece when it inevitably runs into trouble.

That takes us to where we are now. Europe has to "decide whether it wants to create a sufficient central government that has the ability to collect taxes from the whole and the ability to issue debt that obligates the whole, or whether it does not", as Dalio puts it.

Of course, the other big question is: will it even get a chance to make a considered decision on this, or will it collapse first?

Dalio reckons there is "maybe a 30% chance in the next six-month to two-year period of a really bad shock from Europe". However, that would probably lead to more money-printing, and another rally.

But he can't know for sure, of course; nor can any of the rest of us. And this is a point that Dylan Grice of Societe Generale addressed at the conference on Friday: none of us can tell the future something that the history of punditry and investment, from Japan to the tech bubble, makes clear.

And yet, we need to make a choice about what to do with our savings. So given the disparity between these two outcomes which still boil down even now to inflation versus deflation what should you do?

How to protect yourself from a disorderly' Greek exit

The best bet just now is to be positioned defensively. If the best-case scenario (from a short-term investment perspective) happens, and Europe prints money, you'll have time to get on board the rally - the gains won't all happen in a single day.

Alternatively, if Greece manages to pull a Lehman Brothers-style exit on us all, then you won't be as badly exposed as if you had been all-in' before the crash.

So I still like income-producing blue-chips in the UK and the US, although if you plan to buy in now, make sure you're getting a decent yield (I'd want at least 5% on the UK names). Corporate bonds are an option on this front too.

As the cheapest major stock market, I still like Japan. It'd benefit from any rebound in risk sentiment along with other markets.

Hold a good chunk of cash too. Cash-destroying levels of inflation are not yet upon us, so you can afford to keep some powder dry to deploy if and when the big bust comes.

And I'd hold gold as insurance. Somewhat reassuringly, Dalio agrees with us on this point. While he thinks it could be in for a "bumpy ride", he reckons that "most people should have in the vicinity of 10% of their assets in gold", partly as "a very effective diversifier against the other 90%".

As for ideas on what to buy if there's a major plunge, as I noted the other day, my colleague Phil Oakley has written about some solid names to keep an eye on in the magazine this week.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.